California Keeps the Kings and Millions in Tax $$

UPDATE: The battle with Seattle is over. For twenty-seven months, a Washington-based group led by hedge fund manager Chris Hansen and Microsoft CEO Steve Ballmer have pursued the Sacramento Kings, hoping to move them north to become the Seattle Supersonics. But on May 15, the NBA Board of Governors voted down the sale, twenty-two to eight.

The Kings will remain in Sacramento and so will the millions of tax dollars California collects from NBA players. NBA Commissioner David Stern said the league will come up with a decision soon about a competing ownership deal from a Sacramento group. "The big winner here was Sacramento," said Stern.

Hansen's group was offering $550 million . . . no small potatoes, considering the highest price ever recorded for the purchase of an NBA team was $450 million in 2010 for the Golden State Warriors. Five days ago when the Seattle deal appeared to be falling apart, the offer was sweetened to $625,000. The Maloof family, who are the current Kings owners, have been eager to sell. But in the end, it wasn't up to them or the proposed buyers.

California Fights Back

Sacramento Mayor Kevin Johnson, who is himself a former NBA player, lobbied hard to keep the team in California. The reasons why the deal with Seattle was voted down may not be fully revealed, but it was likely a mix of factors, including fan demand and loyalty to the home state.

One thing is certain. Cash-strapped California doesn't want to see yet another major source of tax revenue flow over its borders into other states. As it is, the higher California state income tax goes, the more wealthy residents seem to pack their bags and head to no-state income tax states like Washington.

How much do NBA players add to the Golden State coffers? The latest figures available are from 2010, according to a source at the California Franchise Tax Board. Back then, the four California NBA teams combined paid in $37.4 million in tax revenue.

CPA Robert Raiola (@SportsTaxMan on Twitter) said those teams combined represent the third highest source of tax revenue from professional sports in California, surpassed only by major league baseball and football. Raiola heads the Sports & Entertainment Group for the New Jersey-based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC.

Keep in mind, said Raiola, California's maximum income tax rate has gone up considerably since 2010 when it was 10.3 percent. An increase to a top rate of 13.3 percent was passed by voters in November 2012, but in typical California style, that bump was retroactive to January 1, 2012. So although more recent figures aren't yet available, the total income tax revenue from NBA players is obviously well over the 2010 level of $37.4 million. With California in dire financial straits, it's no wonder the state put up a fight.

"Nothing but Net"

If the sale to Seattle had gone through, the individual players would have the opportunity to save a bundle in state income tax. Maybe this mattered . . . maybe it didn't, because to established residents of any state, income tax is only one factor in the decision of which team to choose. On the other hand, when it comes to the Sacramento Kings recruiting future players, the story might be different. An offer from a Washington team would mean a much higher net income than the same offer from a California team. For those players who aren't already loyal to a team and a state, they may be looking at "nothing but net."

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By Teresa Ambord

Seattle has been salivating for a great basketball team for five years now, ever since the SuperSonics were sold to the highest bidder and moved to Oklahoma. They left behind the name and the logo and some big basketball shoes to fill. That's why a Washington State investment group has been eyeballing California's Sacramento Kings for some time, hoping to lure them north.

California already had the dubious distinction among professional sports teams of being on the high side of taxes, while Washington remains a no-tax state. Thanks to a recently passed tax increase, California now has the highest personal income tax rates in the nation, and that has some wealthy residents reeling.

The Kings are currently owned by the Maloof family. While Forbes estimates the average value of an NBA team is $509 million (up 30 percent from a year ago), the Maloofs want $525 million for 65 percent ownership. The price is high, but a Seattle-based investment group headed by hedge fund manager Chris Hansen and Microsoft CEO Steve Ballmer are on the edge of closing the deal.

Bye Bye Kings?

As Seattle scrambles to lure the Kings north, Sacramento's mayor, Kevin Johnson, is doing his best to stop that sale. Even as the negotiations are about to close and relocation to begin by March 1, Johnson is looking for alternative investors who will keep the Kings in California. Johnson, a former NBA player for the Phoenix Suns (until 1993), understands the needs of an NBA team better than most politicians. That's why, in addition to searching for investors, he's also seeking funding to build a new arena to replace the antiquated Sleep Train Arena where the Kings now play.

If the Kings leave, this will only add to a long-standing problem of California losing tax revenue to other states – especially low- or no-tax states – like Washington. IRS data migration in the fifteen-year period from 1995 to 2010 shows that King County (where Seattle is located) alone has pulled close to half a billion in adjusted gross income (AGI) from just three of California's fifty-eight counties. This includes:

$32 million from Sacramento County

$98 million from Orange County

$313 million from Los Angeles County

To give you an idea how much tax revenue California receives from professional athletes, CPA Robert A. Raiola contacted a source at the California Franchise Tax Board (FTB). According to that source, in 2010, the FTB collected a total of $171.7 million in tax revenue from professional athletes. The first and second largest contributors were major league baseball and football players. California's four NBA teams combined are the third highest revenue source. The FTB collected $37.4 million from NBA players, said Raiola, who heads the Sports & Entertainment Group for the New Jersey–based accounting firm of Fazio, Mannuzza, Roche, Tankel, LaPilusa, LLC.

In 2011, NBA Commissioner David Stern said that based on a USA Today study of NBA salaries (2009–2010 season), the estimated median salary for NBA players was $2.33 million. The average NBA salary, said Stern was $5.15 million in 2011. Either way, that's a lot of money, and a lot of tax revenue to lose. With the federal tax rate now topping out at 39.6 percent on high income earners, and California charging 13.3 percent on those who earn more than a million dollars, tax is bound to be a factor. If the Kings move to Seattle, they get an automatic raise of 13.3 percent on income earned in Washington. Of course, they'll still be subject to the "jock tax" when they play road games.

The Seattle investors also offer a more modern arena and the promise of a new one in two years, which the team itself will help finance and operate.

Is That the Sound of the Golden State Weeping?

Not really. California raised its taxes because of a major budgetary black hole. Governor Jerry Brown and others have strongly criticized those who say they may cut and run for low- or no-tax states. Pro golfer Tiger Woods took his wealth to no-tax Florida years ago. Phil Mickelson is considering relocation. And many less well-known names have already fled or are thinking about it. Yet Brown and other California officials continue to say they're not worried about a few wealthy defectors.

They remain confident that California's favorable geography, climate, and green initiatives will keep enough wealthy residents in place, happy to pay high taxes, and that the budget gap will soon fill up with new revenue.